By Zhu Qiwen (China Daily)
Updated: 2008-01-30 07:22

China's consumer spending remains vigorous while the national economy has slowed slightly in response to the government's tightening measures. This shift in growth toward private consumption is welcome. To facilitate it, policymakers should come up with more fiscal incentives this year to further boost domestic consumption.

Latest statistics show that the country's retail sales were 8.9 trillion yuan ($1.2 trillion) in 2007, up 16.8 percent year on year. The growth, in itself, does not look so remarkable when compared with the 11.4 percent growth of the economy, the fastest in 13 years, on the back of a 47.7 percent jump in the trade surplus and a 24.8 percent rise in fixed-asset investment. But it marks an increase of 3.1 percentage points in consumption growth over the previous year while that of net exports and investments either dropped or flattened. That means domestic consumption made a greater, though still small, contribution to the country's gross domestic growth as the economy began to shift away from its dependence on investments and exports last year.

It is also particularly noteworthy that growth of retail sales last December accelerated to 20.2 percent over the same period in 2006. If that growth momentum continues this year, China may be able to not only to shrug off the impact of a US recession but also make needed progress on changing its growth pattern.

After five years of double-digit growth, the Chinese economy will not likely lose too much steam in 2008. But there are plenty of obstacles to fast growth.

On the one hand, as the prospect of a US recession weighs increasingly heavily on the world economy, weakening external demand will hit Chinese exporters hard while reducing incentives for investment in export-related firms.

On the other, the central bank's monetary tightening policy will further rein in investment growth to prevent the national economy from overheating.

Admittedly, the country is expecting less speedy economic growth as it is set to put in place more stringent energy and environmental standards. But it cannot afford a sharp slowdown caused by shrinking exports and investments given its tremendous employment pressure.

Under such circumstances, accelerated growth of private consumption becomes more important than ever. With the world's largest population of 1.3 billion people, and after three decades of rapid economic growth, China has a huge stake as well as a big opportunity to tap into the domestic consumption potential to sustain economic growth and speed up economic structural changes.

The country must significantly reduce its dependence on investments and exports for economic growth if it is to achieve its goal of cutting energy consumption per unit of GDP by 20 percent and pollutant emissions by 10 percent between 2006 and 2010. Fulfillment of such a goal is crucial to the country's pursuit of sustainable growth. Only robust consumption growth can create room to maneuver for policymakers to curb energy-consuming, pollutant-discharging investments, and exports without darkening the country's growth prospects.

The country's retail sales have increased by an annual rate of 13.1 percent from 2002. And the latest retail sales figures clearly confirm the increasing strength of private consumption expenditure, supported by the persistent strength in household disposable income.

Chinese urban residents' average annual per capita disposable income jumped 17.2 percent to 13,786 yuan in 2007, according to the National Bureau of Statistics. Meanwhile, the per capita net income of rural residents was 4,140 yuan, or 15.4 percent higher than the previous year.

However, in spite of such strong income growth, Chinese consumers are still largely barred from spending sprees because of climbing inflation, inadequate supply of public goods, and the widening wealth gap across the country.

The country's consumer price index, a key gauge of inflation, jumped by 4.8 percent last year, compared to 1.5 percent in 2006. Especially, the double-digit growth in food prices had eroded the purchasing power of the poor more than other people.

Government expenditure on public welfare has increased in recent years but remains far from enough. It is estimated the country's consumption rate could be raised by more than 3 percentage points, if the government spent more on education and healthcare.

The income gap between urban and rural residents further widened last year. That explains why rural people, who account for two thirds of the population, consumed only one-third of the consumer goods in the country.

In view of these problems, the government should make good use of its growing fiscal strength to gradually remove all restraints on domestic consumption.

The Ministry of Finance declared last month it would offer farmers a 13 percent subsidy on the prices of home appliances. Such fiscal support to stimulate sluggish rural consumption and improve the quality of life is much needed.

Nevertheless, to boost overall domestic consumption, policymakers should offer a package of generous fiscal stimuli for the majority of Chinese consumers.

Today, many observers are optimistic about China's resilience against a possible global slowdown, believing that the Chinese government can readily resort to its ballooning national coffer to boost investments if its economic prospects become dim.

But long-term growth of the national economy requires that more fiscal incentives should be offered to consumers.

(China Daily 01/30/2008 page8)